San Diego Housing Market News and Analysis
Ramsey Su: Has Real Estate Bottomed?
Submitted by Rich Toscano on August 7, 2009 - 7:40am
My old pal and foreclosure guru Ramsey has penned another insightful missive that he was kind enough to let me post here on Piggington. I'll let the essay speak for itself, but I will add in regard to the conclusion that I think this shows why the Fed is trapped in the monetization game at this point (and why there is little chance that they will stop until forced to do so). Read on...
Has real estate bottomed?
That is a trick question. There is no correct answer. That question is too broad. A broad answer would be correct and incorrect at the same time, when applied to more specific properties in terms of price, location, type, etc.
That said, it is possible to use a set of criteria to answer that question when the scope is narrowed, using the good old econ 101 stuff - supply and demand.
I believe this pool is relatively small. Economic conditions, especially employment, is not supporting a normal level of household formation. Many would be first time buyers today had already been sucked into the market during the subprime era and are part of the delinquent statistics. Those who have already been foreclosed upon will not be qualified to re-enter the pool for a few more years, depending on how diligently they clean up the credit blemish.
Trade up buyers are non-existent. They will remain dormant until prices start to catch up with their mortgages. Without building up some equity, there is nothing to trade up with.
The current supply phenomenon is a first for me, during my 35 years in the business. Specifically, I have never seen such a huge supply of willing but unable sellers. Every homeowner with negative equity is an unable seller, at the price that meets demand. A big chunk of supply has been removed from the market because of over encumbrance, in addition to those who are not willing to sell until they can their price. It is so strange that the physical inventory is plentiful everywhere and yet, the majority of these properties are not sell-able.
The current supply is created by REOs, short sales and the sellers with ample equity who must sell for whatever reason. Builders also are unable to supply the current demand, since they may be building at negative net margins. Consequently, there is an acute shortage of housing for the current demand.
SUPPLY DEMAND GAP
Once again, this is a phenomenon that I have never experienced. Normally, when there is a supply demand imbalance, prices will either move up or down to some form of equilibrium. The current demand is capped by affordability. The supply cannot voluntarily reduce the price to meet demand, resulting in a huge gap between what demand can pay and what supply can sell at.
With all the ill-conceived modification plans and government intervention to date, this gap is widening. Instead of gradually closing the gap, properties are removed from the unsellable pool into a sellable pool via foreclosure of short sales. For example, a property with a $500,000 mortgage is not sellable but if the lender forecloses or agree to a short sale at market price of, say, $300,000, the exact same property becomes not only sellable but high in demand.
Financing is on life support. How long can the government support it?
First look at FHA. Here is the "Highway Trust Fund" bill. The headline is adding $7 billion to the highway trust fund. What on earth does it have to do with FHA? Look at Sec. 3 here:
SEC. 3. FHA MORTGAGE INSURANCE COMMITMENT AUTHORITY.
One little paragraph and FHA insurance received an increase of $85b to $400b.
If you look at SEC. 4, GNMA got an extra $100b also. This is the way our government sneak expenses past unsuspecting citizens? In comparison, the $2b cash for clunker debate seems totally silly. Bernanke or Geithner can fund that out of petty cash. Anyway, I digressed.
So we know that FHA funding is there and will continue to insure loans, many of which will be on the delinquent list for years to come. For 2009 so far, FHA's market share of mortgage origination is in the 20% range.
For the first half of 2009, FRE purchases and issuances totaled $319b.
Similarly, FNM issued $470b for the same period.
FNM estimates $2.5 trillion of total mortgage origination in 2009.
Our forecast for mortgage originations is of course heavily conditioned on Federal Reserve policy. As it currently stands, we expect to see roughly $2.5 trillion in originations in 2009, with more than half of that already behind us, and a decline to around $1.5 trillion in 2010 in the event the Fed ends its mortgage-related programs at the end of 2009, as current policy states. The drop off is almost entirely in refinance volumes as the end of the purchase program will almost certainly bring an increase in both mortgage rates and spreads.
Combined, FRE and FNM issuances totaled $789b for the 1st half of 2009. At this pace, their combined market share should be about 63% of mortgage originations.
More worrisome is the fact that this mortgage debt is purchased by Bernanke's printing machine. For the first half of 2009, the Federal Reserve has purchased $621b of agency MBS, at the pace of over $20b per week.
Using data above, I am estimating that GOVERNMENT CONTROLLED FINANCING HAS A WHOPPING >80% MARKET SHARE of mortgage financing and THE FEDERAL RESERVE IS PURCHASING OVER 60% OF THESE MORTGAGES. The significance of the government's role in financing is unprecedented and grossly under appreciated.
This is not monetary policy or stimulus, this is government takeover. There is no plan for FRE and FNM aside from continuously funding their losses. We are more than half way through 2009 and the real estate market is completely survived by Bernanke's purchases. In six months, Bernanke's announced MBS purchase plan would be over. He is on pace to use up every penny of the $1.2 trillion he printed for this purpose. What is his exit plan for 2010?
Go back to the demand discussion above -- how much of that demand would vanish if this government financing is not available? How many buyers would be removed from the demand pool for each fractional increase in mortgage rates?
Has real estate bottomed? The real estate market is in such a precarious position supported by an unbelievably accommodating Federal Reserve that I find it difficult to call it anything. The current market is unsustainable, something needs to change. Bernanke must announce his plan for mortgage manipulation soon. Geithner is wasting more time and money with silly modifications.
In my opinion, if Bernanke discontinues his agency MBS purchase plan, the market will collapse overnight. The suspense will soon be over.
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